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Germany plans €96 billion in new debt for 2021

September 18, 2020

To avoid thwarting the economic recovery, Finance Minister Olaf Scholz is, again, set to turn a blind eye to the government's strict rules on public debt. The plan has been denounced as a pre-election spending spree.

A mask sits atop a table full of euro bills
Image: Imago Images/F. Sorge

The German government is planning to take on €96.2 billion ($114 billion) in new debt in 2021 as a result of the coronavirus pandemic, the Finance Ministry announced on Friday.

The draft spending plan again shatters years of fiscal prudence and a longstanding commitment to a balanced budget, meaning ministers will not be able to reapply the so-called debt brake until 2022.

The brake, which limits the Federal government's structural net borrowing to 0.35% of gross domestic product (GDP), was adopted in 2009 after the financial crash.

Read more: German firms expect coronavirus restrictions to public life for a further 8.5 months

Rule broken once

The strict rule was already waived this year when Berlin made provision for up to €217.8 billion in additional borrowing to help stem the economic effects of the COVID-19 health emergency.

The debt has helped the government to reduce VAT (sales tax) and extend billions of euros in subsidies to firms to avoid mass layoffs through its reduced hours working program (Kurzarbeit). 

The German economy suffered a 9.7% contraction in the second quarter — its largest on record and almost double the decline of the 2008/9 financial crisis. Early signs suggest a strong rebound is underway, although it is threatened by a potential second wave of the virus.

The ministry now plans to spend €413.4 billion in 2021. Despite the additional debt, public spending is forecast to be 23% less than the €509 billion set aside for this year after implementing two emergency budgets.

The new debt plan takes into account all existing stimulus measures, including plans announced on climate protection, coal energy transition and digitization.

Read more: Germany proposes major cross-party 'climate charter'

Health and pension top-ups

A one-off extra subsidy of €5 billion has been earmarked for the sinking fund for Germany's statutory health insurance companies next year. 

The largest payment in the budget is expected to be around €106 billion to eliminate a deficit in the state pension system.

The spending plans drafted by Finance Minister Olaf Scholz will still leave the government short of €42 billion between 2022 and 2024. 

Scholz has previously not ruled out the possibility of raising taxes for high earners to bring down the federal debt, which is expected to exceed 72% of GDP by the end of the year.

But a ministry spokesperson said on Friday: "We are not planning any measures that would prompt action on the income [tax] or expenditure [public sector cuts] side."

Read more: Zombie firms: Will a wave of insolvencies hit Germany?

'Reelection budget'

The plans, which will be put to the Cabinet next week, were criticized by opposition MPs as either serving to help Chancellor Angela Merkel's ruling conservatives to win re-election next year, or as missing an opportunity to commit additional funds to the climate emergency.

The business-friendly FDP's deputy parliamentary faction leader Christian Dürr said the new debts would not be enough for firms hit by the crisis.

The coalition would do better to "put all new expenditures that do not necessarily contribute to crisis management to the test," he told Agence France-Presse.

mm/msh (AFP, dpa, Reuters)